Accounting Chapter 1

Front 1

1. What are the three forms of business organizations?

Back 1

Sole Proprietorship
Partnership
Corporation

Front 2

advantages and disadvantages:Sole Proprietorship

Back 2

Advantages:
Simple to establish,owner controlled, tax advantages that are more favorable than a corporation

Disadvantages:
proprietor personally liable for all business debts, financing may be difficult, transfer of ownership may be difficult

Front 3

advantages and disadvantages:Partnership

Back 3

Advantages: simple to establish, shared control, broader skills and resources, tax advantages that are more favorable than a corporation

Disadvantages: Partners personally liable for all business debts, transfer of ownership may be difficult

Front 4

advantages and disadvantages: Corporation

Back 4

i. Advantages: easier to transfer ownership, easier to raise funds, lower legal liability-no personal liability for stockholders

ii. Disadvantages: unfavorable tax treatment resulting in higher taxes paid by stockholders

Front 5

2. What are the two main user groups of financial information?

Back 5

a. Internal users- marketing, human resources, finance, management
b. External users- investors, creditors, (IRS,SEC,FTC, labor unions, custromers)

Front 6

3. List the four financial statements and the purpose of each

Back 6

a. Income statement
b. Retained Earnings Statement
c. Balance Sheet
d. Statement of Cash Flows

Front 7

a. Income statement

Back 7

i. Reports success or failure of the company’s operations during the period
ii. Summarizes all revenue and expenses for period
iii. Calculates net income or loss

Front 8

b. Retained Earnings Statement

Back 8

i. Indicates amount paid out in dividends and amount of net income or net loss for period
ii. Shows changes in the retained earnings balance during period covered by statement

Front 9

c. Balance Sheet

Back 9

i. Shows relationship between assets and equities (liabilities and stockholders’ equity)

Front 10

d. Statement of Cash Flows

Back 10

i. Provides information about cash receipts and cash payments for accounting period
ii. Reports the cash effects of a company’s operations for a period of time
iii. Shows cash increases and decreases from investing and financing activities

Front 11

4. What are the three main categories of business activities

Back 11

a. Financing activities
b. Investing activities
c. Operating activities

Front 12

a. Financing activities

Back 12

- cash is often obtained from outside sources to start or expand a business
i. Borrowing from creditors which creates a liability
ii. Issuing ownership interest in the corporation to investors which creates equity

Front 13

b. Investing activities

Back 13

cash raised through financing activities is used for investing in resources (assets) needed to operate the business

Front 14

c. Operating activities

Back 14

once a business has the assets it needs to get started, it begins its operations
i. Revenue and Expenses

Front 15

5. What is the basic accounting equation

Back 15

a. Assets= Liabilities + Stockholders’ equity

Front 16

6. What are the other elements of the annual report

Back 16

a. Management Discussion and Analysis
b. Notes to Financial Statements
c. Auditor’s Report

Front 17

a. Management Discussion and Analysis

Back 17

i. Its ability to pay near-term obligations (liquidity)
ii. Its ability to fund operations and expansion (capital resources)
iii. It results of operations

Front 18

b. Notes to Financial Statements

Back 18

i. Clarify information presented in the financial statements
ii. Describe accounting policies or explain uncertainties and contingencies

Front 19

c. Auditor’s Report

Back 19

i. An auditor, a CPA, conducts an independent examination of the company’s financial statements
ii. An auditor gives an unqualified opinion if the financial statements present the financial position, results of operations and cash flows in accordance with the GAAP

Front 20

Assets

Back 20

resources owned by a company

Front 21

liabilities

Back 21

the debts and obligations of a business. Liabilities represent the amounts owed to creditors

Front 22

Revenue

Back 22

The increase in assets that result from the sale of a product or service in the normal course of business

Front 23

expenses

Back 23

the cost of assets consumed or services used in the process of generating revenues